The Federal Emergency Management Agency (FEMA) faces challenges when it comes to helping the public understand flood risk in relation to the designation of Special Flood Hazard Areas (SFHAs), which are zones that have an approximate 1% probability of being inundated with a flood in any given year, and where the purchase of flood insurance is mandatory for property owners with a mortgage.
Today, these areas are far from the only regions with flood risk as has been highlighted by the flooding events that have impacted the US in recent years.
“The Special Flood Hazard Area is a regulatory designation established decades ago to guide development and attempt to help insurers and lenders and homeowners understand flood risk in a given area or for a given property. The 100 year flood zone, as it came to be known, continues to have value and use but may not help the public to fully understand risk and may not help insurers trying to enter the private flood insurance market to price their risk,” said Shelly Yerkes, senior professional of product management at CoreLogic.
“We have seen, especially in the past decade, that catastrophic flooding is affecting areas well outside the Special Flood Hazard Areas, so analytics beyond the Special Flood Hazard Area are needed by insurers to understand the variability of flood risk that’s happening.”
For example, two homes that are 40 feet apart, with one located 20 feet inside the SFHA boundary and the other located 20 feet outside the boundary, could have virtually identical flood risk, yet their risk ratings would be very different. This scenario came to life during storms in 2018. Based on CoreLogic’s flood loss analysis of Hurricane Florence, which utilized CoreLogic’s US Inland Flood Model, 59% of affected properties for the event were outside a FEMA-designated SFHA.
Moreover, the number of flood-exposed properties that are not located within the boundaries of SFHAs continues to grow.
“Every time you see a subdivision developed, that changes the number of properties at risk and can increase the potential of flooding downstream. This impacts communities that have never known flooding before and residents can be caught unaware of their changing risk. We’ve got so much growth in areas like Houston, for example, [which is] one of the fastest growing metro areas in the country, so every year that risk is increasing,” explained Yerkes.
FEMA has embarked on a journey to transform the National Flood Insurance Program (NFIP), and improve how it determines flood risk and flood insurance premiums, beyond sole reliance on SFHAs, though the new rates under Risk Rating 2.0 for single-family homes won’t go into effect until October 2020.
In the meantime, the ‘everybody elses’ that fall outside of SFHAs and don’t have to purchase federally-backed flood insurance are risking significant losses as destructive floods hit the US each year.
“The number of the ‘everybody elses’ has been increasing, so everyone from politicians to insurers to lenders and homeowners are starting to think that maybe flood insurance is important and people should understand the risk better, and insurance carriers are looking to offer products that are relevant, but they also need to be priced in a way that’s affordable and in a way that allows insurers to be profitable,” Yerkes told Insurance Business.
There are, however, obstacles in insurers entering the private flood insurance space. Insurance companies need to have an accurate loss cost, and understand the correlation between flooding and hurricanes, which can vary depending on where properties are located along a coast. Storms in Florida, for instance, tend to be wind events, whereas Gulf Coast states, like Louisiana and Texas, see less severe wind damage, but flooding can be enormous, explained Yerkes.
“The challenges for insurers are to try to measure the risk, and not just assume that every storm is going to cause the same amount of flooding no matter where it falls along the coast,” she added, highlighting the need for high gradient location information since a hazard can change over very short distances, such as a house that’s raised slightly on a property versus a next door neighbor’s house that’s not. “Having an accurate understanding of location is extremely important because no matter what kind of analytics you have on the backend, if you really don’t know where that structure lies, you may not get an accurate view of risk.”
CoreLogic offers geolocation and structural data about every building in the United States, alongside providing probabilistic models, which can model every scenario that could potentially happen and show how it would affect a property.
“We have the analytics tools that will give insurance companies the ability to accurately measure and then manage their risk,” said Yerkes. “If they can’t measure it, they can’t price, and if they can’t price it, then they can’t manage any part of the business flow.”
If insurers can overcome these obstacles, the flood insurance market is ripe for the taking.
“All of those people outside the FEMA Special Flood Hazard Areas that are not required to buy flood insurance are in a high to moderate to low risk area. It’s an enormous market, so there is potential out there if companies can leverage their data and analytics,” said Yerkes, pointing to a report from the Congressional Budget Office (CBO) that indicated the US average for expected flood damage from hurricane-induced damage alone, is $20 billion, just to the residential sector. Factoring in non-hurricane-induced flood events ticks that number further upward.
“Outside of the NFIP, if everybody bought flood insurance, we could be looking at a market size of at least $20 billion a year, so there’s very good opportunity for this, but it is going to take a paradigm shift for the public and the industry to understand the probability of flooding and understand their risks so that they will go to that extra expense to purchase the insurance when it becomes available.”